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2023 US Equity Market Outlook Update (Still Traveling Along A Bumpy Road)
Episode 81st March 2023 • RBC's Markets in Motion • RBC Capital Markets
00:00:00 00:07:39

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the podcast, a refresh of our:

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re sticking with our year end:

Our forecast is unchanged since we introduced it last October and is roughly the average of six different models. Our most optimistic test puts the index at just over 4,400 and our least optimistic test puts the index at just over 3,800. Overall, the range of outcomes is a little lower than our last update.

Generally, we are looking for:

We think the path to 4,100 is likely to be bumpy as earnings forecasts are cut, the moderation in inflation proves to be uneven, investors await a transition in Fed policy (stocks often fall ahead of final hikes),

And as investors digest the onset of a challenging economy (the median return for the S&P 500 has been 0% in years where real GDP is in the 0-2% range, as current consensus forecasts are anticipating).

er a recession will emerge in:

d about the impact of falling:

and that in downgrade cycles most cuts tend to happen by April. Buyside expectations have been lower than sellside expectations for quite some time (several told us last year they were anticipating $205-$210 as opposed to the sell side’s current forecast of $223).

rable earnings challenges for:

pulled forward some of:

Money flows are also favoring non-US equities over domestic equities, but it’s worth noting that US valuations are looking less problematic relative to Europe again.

All that being said, the sentiment set up has been positive. Retail investors came into the year deeply bearish on the AAII survey, a bit worse than pandemic lows and at levels that in the past have been followed by a 15% 12-month forward gain in the S&P 500 in the past. A recovery has started here, but is only middle innings.

% on Fed funds at YE:

Overall, we feel neutral on the stock market from here through year end with our forecast calling for a little upside. Not the most exciting call to be sure, but one that we feel is the right way to think about things.

Moving on to Takeaway #2: We See A Balanced Risk/Reward Between Large Cap Growth And Value Through Year-End, Despite Incremental Pressure on Growth Near-Term From renewed Fed and inflation fears.

Arguments that we currently see in favor of Value include:

• Value looks a little better from a balance sheet perspective, with receding short term and long term debt levels.

• Growth has turned slightly expensive relative to Value again, with the Growth/Value relative P/E now slightly above its long-term average as of mid-February. This is a change from the end of last year when the Growth/Value P/E ratio was sitting at its long term average.

• Major crises tend to usher in shifts in leadership between Growth and Value. Coming out of the Tech bubble, leadership shifted from Growth to Value.

Meanwhile, arguments that we see in favor of Growth include:

• Earnings revisions trends have turned a little stronger in Growth than Value.

• Growth has a bit more international exposure than Value, at least within Large Cap, and has benefited from renewed interest in international markets and the weakening Dollar.

r barely averted recession in:

Admittedly, in the end this trade may come down to the ultimately direction of 10 year yields.

Wrapping up with Takeaway #3: We Continue To Prefer Small Caps To Large Caps, But Admit that the set up is less favorable than it was when we upgraded Small Caps to overweight last July.

e likelihood that the Russell:

• Valuations still look appealing for Small Caps relative to Large Caps…

• And Small Caps still have room to run on their own P/E which is only back to the long-term average after hitting typical troughs last summer.

• Money flows have been more favorable for Small Cap to start the year.

• Tighter high yield spreads have supported the Small Cap trade.

Here’s why we think the setup for Small Caps isn’t quite as strong as it was last summer:

• Earnings revisions are no longer stronger in Small Cap than Large Cap – we think is largely due to less US Dollar pressure on large cap earnings.

• There’s less interest in US domestic markets as interest in international markets has picked up.

mic challenges. To the extent:

That’s all for now. Thanks for listening. And be sure to reach out to your RBC representative with any questions.